Thursday, June 28, 2012

Trend followers NEVER predict

Given the current state of the indices, it is clear to see that, while we are off the lows from earlier this month, no meaningful breakout to the upside has occurred. These periods where there is no meaningful trend, can easily erode a traders' capital due to the whipsawing and 'noise' in the charts. As I write this, markets are down again today, reflecting the volatlity and uncertainty currently present.

Traders can easily be tempted to try and 'predict' the future movements of a market, whether by looking at economic news, some form of chart pattern, reliance on indicators etc. Trend followers solely react to price, and as a result have no preference as to the direction the market takes.

It can be argued that people who try and 'predict' future market direction and/or the tops and bottoms in those markets would be able to achieve a higher reward:risk ratio on their winning positions than a trend follower, who due to the nature of their system, would automatically use wider stops as per their system rules. However, it should also be remembered that during periods when a market is in a strong trend, those picking tops and bottoms can incur repeated losses.

At the end of the day, trend followers are simply concerned with making money, not with becoming a guru on future market direction, and one of the ways they do that is simply to let the market determine in which direction you should be trading, before committing any capital.

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